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Tickers in this Article: SGY, CPE, BP
The management of Stone Energy (NYSE:SGY) meant well when they sought to double the size of the company with an acquisition in 2008. However, the ill-timed purchase when oil prices were near a peak has led to investors fleeing en masse and an 83% reduction in the stock price.

Stone Energy is an oil and gas exploration and production company with several different areas of focus including the deepwater and deep shelfGulf of Mexico, the Appalachian area and the Western U.S. The company's reserve mix is 59% gas and 41% oil. Their reserve to production ratio is 6.5 years, due to its concentration in the Gulf of Mexico, where wells are typically larger but decline quicker. (Read more on analyzing energy related stocks in The Industry Handbook: The Oil Services Industry.)

In May 2008, Stone Energy announced a deal to purchase Bois D'Arc Energy for $1.8 billion in stock and cash. The deal closed in August 2008. The acquisition doubled its proved reserve base from 385 billion cubic feet equivalent (Bcfe) to 720 Bcfe, increasing estimated production by 50%.

Unfortunately for Stone Energy, the company levered up significantly to pay for the deal going from a net debt position of $75 million to its current net debt of $650 million. The falling price of the commodity has led to a slash in capital spending for 2009 and a resulting drop in production growth. The company plans on spending $300 million in 2009, and expects its production to be in a range of 225 to 250 millions of cubic feet equivalent (MMcfe) per day. While this still represents growth over 2008 due to the Bois D'arc acquisition, the market was clearly disappointed.

While cutting capital expenditures for projects that are no longer viable or to be financially conservative is the correct strategy to pursue, investors are leaving. The stock reached a high of $74 in May 2008, and now trades in the low teens.

Hurricane Risk
Stone Energy is exposed to infrastructure risk during hurricane season in the GulfCoast, which lasts from June to November. During the 2008 season, the company lost six structures that produced 10 MMcfe per day.

Other Areas
One important company prospect is the La Posada property in the deep shelf area of the Gulf of Mexico. The company is continuing to develop this property even with the announced decrease in capital expenditures. The company also has more than 50 other deepwater blocks under lease in the Gulf of Mexico as of December 2008.

On Shore Development

The company is also working on developing its natural gas properties in the Appalachia area. It has 30,000 acres under lease currently, and has drilled four wells with two producing. Stone Energy is targeting the Marcellus Shale and will develop this area further in 2009. Stone Energy has 50,000 net acres under lease in the Western United States where it is developing oil, not natural gas. It is targeting the Bakken Shale.

The company had $173 million in cash and $825 million in debt as of September 30, 2008. Two senior notes comprise $400 million of that total debt and are not due until 2011 and 2014. The balance of the debt is a bank credit facility that matures in July 2011.

Stone Energy is not the only company to suffer due to its exposure to the offshore and lowered commodity prices. Callon Petroleum (NYSE:CPE) recently announced that it was suspending development on the Entrada prospect in the Gulf of Mexico that it jointly owned with BP (NYSE:BP). (Find out how to take advantage of this market without having to open a futures account in A Guide To Investing In Oil Markets.)

Stone Energy made a significant acquisition last year to set the company up for future growth. This was a viable strategy while oil prices were constantly rising, but now the company is suffering the dark side of the energy cycle that many investors thought would never come.

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